Question 1

Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?

Accepted Answer

Convertible bonds are not cheaper or mor

Question 2

What is the conversion value of the bond?

Accepted Answer

A) $35 
B) $70 
C) $700 
D) $1,000 
E) No conversion premium is given. 
A) $35 
B) $70 
C) $700 
D) $1,000 
E) No conversion premium is given.

Question 3

A firm has 2,000 shares of stock and 200 warrants outstanding.The warrants are about to expire,and all of them will be exercised.The market value of the firm's assets is $14,000,and the firm has no debt.Each warrant gives the owner the right to buy 1 share at $5.What is the warrant's effective exercise price?

Accepted Answer

Value of the warrant = {[$14,0

Question 4

What is the conversion premium?

Accepted Answer

A) 0.00% 
B) 29.86% 
C) 59.01% 
D) 106.61% 
E) None of the above. 
A) 0.00% 
B) 29.86% 
C) 59.01% 
D) 106.61% 
E) None of the above.

Question 5

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:

Accepted Answer

A) the effects of risk are opposite on the two value components and tend to cancel each other out. 
B) if the firm is high risk,the option premium will be higher while the straight bond value is fixed. 
C) only risky companies issue these instruments. 
D) the equity value is dependent on current risks only,not the future risk at conversion. 
E) None of the above. 
A) the effects of risk are opposite on the two value components and tend to cancel each other out. 
B) if the firm is high risk,the option premium will be higher while the straight bond value is fixed. 
C) only risky companies issue these instruments. 
D) the equity value is dependent on current risks only,not the future risk at conversion. 
E) None of the above.

Question 6

The holder of a $1,000 face value bond has the right to exchange the bond any time before maturity for shares of stock priced at $50 per share.The $50 is called the:

Accepted Answer

A) conversion price. 
B) stated price. 
C) exercise price. 
D) striking price. 
E) None of the above. 
A) conversion price. 
B) stated price. 
C) exercise price. 
D) striking price. 
E) None of the above.

Question 7

Why are warrants and convertibles issued?

Accepted Answer

Warrants and convertibles are issued to

Question 8

A bond/warrant package is priced to sell at a face value of $1,000.Each bond comes with 50 detachable warrants.A warrant gives the owner the right to buy 1 share of stock at $20 per share.The value of a warrant has been estimated at $2.The bonds mature in 20 years.Similar bonds without warrants yield 10%.What is the bond's annual coupon?

Accepted Answer

Set the price of bond/warrant package eq

Question 9

Which of the following would not describe the difference between warrants and call options?

Accepted Answer

A) Warrants are issued by firms whereas call options are issued by individuals. 
B) Call options have an exercise price whereas warrants do not. 
C) Exercising of warrants creates dilution whereas exercising call options does not. 
D) When call options are exercised existing shares trade hands whereas if warrants are exercised new stock must be issued. 
E) None of the above. 
A) Warrants are issued by firms whereas call options are issued by individuals. 
B) Call options have an exercise price whereas warrants do not. 
C) Exercising of warrants creates dilution whereas exercising call options does not. 
D) When call options are exercised existing shares trade hands whereas if warrants are exercised new stock must be issued. 
E) None of the above.

Question 10

If the warrants are all exercised immediately,what would be the market price of the stock?

Accepted Answer

A) $22.78 
B) $25.13 
C) $26.96 
D) $28.00 
E) $29.00 
A) $22.78 
B) $25.13 
C) $26.96 
D) $28.00 
E) $29.00

Question 11

A convertible preferred stock is similar to a convertible bond except:

Accepted Answer

A) the conversion ratio is fixed (given). 
B) the conversion price is fixed (given). 
C) the time to maturity is infinite. 
D) All of the above. 
E) None of the above. 
A) the conversion ratio is fixed (given). 
B) the conversion price is fixed (given). 
C) the time to maturity is infinite. 
D) All of the above. 
E) None of the above.

Question 12

The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock.The conversion ratio is:

Accepted Answer

A) 25. 
B) 40. 
C) 100. 
D) Depends on the current market price of the bond. 
E) None of the above. 
A) 25. 
B) 40. 
C) 100. 
D) Depends on the current market price of the bond. 
E) None of the above.

Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?

What is the conversion value of the bond?

What is the conversion premium?

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:

The holder of a $1,000 face value bond has the right to exchange the bond any time before maturity for shares of stock priced at $50 per share.The $50 is called the:

Why are warrants and convertibles issued?

Which of the following would not describe the difference between warrants and call options?

If the warrants are all exercised immediately,what would be the market price of the stock?

A convertible preferred stock is similar to a convertible bond except:

The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock.The conversion ratio is:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Net Present Value and Other Investment Rules

Interest Rates and Bond Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Raising Capital

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Derivatives and Hedging Risk

International Corporate Finance

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Exam 24: Warrants and Convertibles

Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?

What is the conversion value of the bond?

What is the conversion premium?

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:

The holder of a $1,000 face value bond has the right to exchange the bond any time before maturity for shares of stock priced at $50 per share.The $50 is called the:

Why are warrants and convertibles issued?

Which of the following would not describe the difference between warrants and call options?

If the warrants are all exercised immediately,what would be the market price of the stock?

A convertible preferred stock is similar to a convertible bond except:

The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock.The conversion ratio is:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Net Present Value and Other Investment Rules

Interest Rates and Bond Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Raising Capital

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Derivatives and Hedging Risk

International Corporate Finance

Filters